Author: Drish Israni
Growing Popularity of the Hang Seng Index
The Hang Seng Index (HSI) has emerged as a focal point for global investors seeking exposure to China’s dynamic economy. With the Chinese stock market near 25-year lows and proactive government stimulus measures boosting investor sentiment, the Hang Seng Index offers a unique opportunity to explore China’s growth trajectory. As Charlie Munger famously said in 2023, “The Chinese economy has better future prospects over the next 20 years than almost any other big economy.” Furthermore, China’s composite weight in the MSCI Emerging Markets Index increased to 27% in 2024, reflecting its dominance and recovery in the global economic landscape.Hang Seng Index Constituents
The Hang Seng Index, consisting of 82 constituents, provides broad exposure to key sectors of China’s economy. It is the usual go-to benchmark for investors seeking exposure to Chinese companies due to its representation of major sectors and prominent firms. However, its heavy concentration in certain industries raises questions about diversification and growth potential.Sectoral Weightage of the Hang Seng Index:
Sector |
Weightage |
| Tech | 33.31% |
| BFSI | 33.23% |
| Energy | 8.03% |
| Consumption | 5.65% |
| Auto | 4.43% |
| Real Estate | 4.42% |
| Telecommunication | 3.87% |
| Pharma & Healthcare | 1.95% |
| Tourism & Hospitality | 1.68% |
| Building Materials | 1.56% |
| Metals & Mining | 1.05% |
| Logistics | 0.54% |
| Infra | 0.28% |
With technology and BFSI accounting for nearly 66%, the Hang Seng Index is heavily concentrated in these sectors. This lack of diversification poses significant risks for investors seeking to capture alpha or hedge against sector-specific downturns. Additionally, many China-focused mutual funds or ETFs mirror the composition of the index, further amplifying this concentration. As a result, these investment vehicles may not be the most efficient way to gain exposure, especially given the underperformance of these two sectors in recent times.
Risks of Sector Concentration in the Hang Seng Index
1. Technology Dominance and the Tech Bubble:
- Between 2020 and 2022, Chinese tech companies accounted for a substantial 37% of the total capital raised through public offerings. Notably, seven out of the top ten public issuers during this period were technology-focused firms.
- The tech sector’s rapid growth led to inflated valuations, with many companies investing in non-core areas, diluting their operational strengths.
- As regulatory scrutiny intensified, including antitrust measures, the sector saw sharp corrections, with many stocks experiencing significant drawdowns, creating volatility.
2. Real Estate and BFSI Risks:
- Real estate, once a key growth driver, faces ongoing challenges from the “Three Red Lines” policy and the Evergrande crisis, which have dampened consumer confidence and market stability.
- BFSI struggles with shrinking net interest margins (NIMs) due to recent rate cuts by the People’s Bank of China and increased pressure to support stimulus-driven internal consumption.
- Rising non-performing loans (NPLs) have particularly impacted smaller regional banks, further destabilizing the financial sector.
Missed Opportunities in Emerging Industries
The Hang Seng Index’s sectoral bias limits exposure to high-growth industries with transformative potential:1. Automobiles :
- China is the largest market for electric vehicles (EVs), with companies like BYD leading the global transition. EV sales in China grew by 93% year-over-year in 2023, highlighting the sector’s strong momentum.
2. Consumer Goods & Logistics:
- Rising domestic consumption, driven by government stimulus, fuels demand for consumer goods. Logistics companies stand to benefit as supply chain efficiencies improve to meet growing e-commerce demands.
3. Capital Markets:
- As China’s capital markets mature, rising demand for innovative financial products creates opportunities for asset management, brokerage firms, and clearing houses. To support market growth, the China Securities Regulatory Commission has introduced reforms to boost M&A activity, while the People’s Bank of China has launched stimulus measures. These include 100% liquidity for banks to fund stock repurchases and swap facilities for securities firms, mutual funds, and insurers to pledge assets, echoing the U.S. TARP program of 2009.
The Aequitas Approach
At Aequitas, we adopt a disciplined investment philosophy built on value, growth, and contrarian investing. Our Far East Fund exemplifies this approach by:1. Portfolio Characteristics:
- Built with a 4% dividend yield, providing consistent returns alongside capital appreciation.
- High margin of safety: 50% of portfolio companies have a market cap-to-sales ratio below 2, and 90% have a PE ratio under 20x.
2. Strategic Partnerships:
- Empanelled with the top two brokers in China, ensuring access to high-quality market insights.
3. Sector Diversification:
- Avoids overexposed sectors like tech and BFSI, focusing instead on industries with sustainable growth potential, such as green energy, healthcare, and consumer goods.
Case Study: BYD and the EV Revolution
BYD, a leading Chinese EV manufacturer and the world’s second-largest automaker, exemplifies the opportunities in China’s emerging industries. The company’s innovative approach, government-backed initiatives, and strong fundamentals have positioned it as a global leader in EVs. Notably, Warren Buffett has been an investor in BYD since 2015, highlighting its robust long-term growth potential. In the past month, BYD has positively revised its 2025 guidance, aiming to deliver 5 to 6 million vehicles, driven by the planned launch of its next-generation Blade battery, which is expected to enhance range and reduce costs by 15%. With EV adoption accelerating worldwide, these strategic advantages make BYD a standout investment opportunity. Explore our comparative analysis of select large-cap, highly profitable Hang Seng-listed opportunities in comparison to their Indian counterparts: Caveat Emptor 1 & Caveat Emptor 2Conclusion
Investing in the Hang Seng Index provides exposure to China’s dynamic economy but comes with notable challenges, including sector concentration and volatility. Aequitas’ Far East Fund, with its disciplined strategy and focus on diversification, enables investors to harness the potential of China’s transformative opportunities. To learn more about our investment opportunity in the Far East, click here.
